Educational Articles

Dow-30 Earnings: General Electric - First Quarter 2013

Erik M. Manning
| April 19, 2013

General Electric (GE - Free General Electric Stock Report), one of the world's largest and most diversified technology and financial services companies and the only remaining member of the original Dow Jones Industrial Average, has reported results for its March period. Earnings were in line with our expectations and revenues bested our call but were, as anticipated, down a bit from the previous year's figure. The initial response to this release was not favorable, and the stock sold off modestly in early trading. We assume a somewhat soft forecast for European operations contributed to this decline.

Share net for the three-month period was $0.35 on a continuing operations basis, a penny higher than the comparable tally in the first quarter of 2012. This figure excludes the $0.04 gain recorded from the net proceeds of the sale of the remaining stake in NBCUniversal, after backing out industrial restructuring and other charges.

With regard to the top line, sales came in at $35.0 billion, better than our and Wall Street's consensus view of $34.7 billion, but lower than 2012's figure of a hair under $35.2 billion. Fears that a poor number might be coming were fanned of late when a lukewarm report was released on March U.S. factory activity. Regardless, strong sales to aviation customers buoyed results. Management had already forecast lesser wind and gas turbine shipments, and the continuation of a challenging environment in Europe also encumbered revenues overall. The United States remained firm, however, and emerging markets picked up a considerable amount of the slack. Results at the power and water segment were a bit weaker than many had anticipated, but expectations are for this unit to gain strength as the year progresses and post year-over-year sales gains in the second half. Revenues generated by the remainder of the industrial portfolio grew 6%, led by aviation, transportation, and home and business solutions.

Two areas that play a large role in shaping our 2013 estimates are the cost-out plan and the backlog. The cost-out plan calls for a reduction of $1 billion in industrial structural expenditures during 2013. The plan from the beginning has called for an acceleration as the year wears on, so the $200 million in savings during the first quarter has us optimistic. Looking at the backlog, it closed the period at $216 billion, up $6 billion from the $210 billion figure that closed out 2012. This exemplifies that demand is stout and clients are willing to wait for GE's expertise. Highlighted contracts obtained in the period included a $620 million services pact with an LNG plant in Australia and a $500 million deal to provide power equipment and long-term service for Emirates Aluminum smelter complex in Abu Dhabi.

Meantime, the unwinding of GE Capital continues in earnest. That arm has been performing well of late, and earnings here rose 9% in the March quarter. Some investors are clamoring for a faster shrinkage of this unit, but we think management is going about its plan at a good pace. Much negativity still surrounds the finance arm, since it was the primary cause of GE's struggles during the financial crisis of 2007-2009. Separately, during the first quarter, the acquisition of MetLife's $6.4 billion deposit base and online deposits business was completed.

Elsewhere, the aforementioned sale of the remaining piece of NBCUniversal has lined the company's coffers nicely. Proceeds from that sale, and the $90 billion in cash on the books as of the end of March, add significant funds to GE's capital allocation plan. This strategy calls for about $18 billion to be returned to shareholders in 2013 via dividends and stock buybacks. Another chunk of cash will probably go toward an inventory build-up in anticipation of the second-half upturn in volume, but finances ought to remain strong regardless.

All told, GE is well-positioned for a stronger performance over the balance of the year. Indeed, we are raising our revenue call by 3%, to $150 billion, to reflect the solid top-line performance in the first quarter. Our earnings estimate remains unchanged at $1.70 a share, which would represent a 12% advance from 2012. However, if second-quarter earnings were to show continuing strength, our full-year bottom-line forecast could merit an upward adjustment.

In all, we think GE has turned the corner. It was dealt a fierce blow at the time of the financial crisis, but the company is in the process of refocusing on its bread-and-butter industrial roots and the gains to be made in these fields are substantial. Also, both those seeking long-term capital appreciation and income should be rewarded handsomely. GE's 3- to 5-year appreciation potential and its dividend yield are both ahead of the Value Line median.

About The Company: Founded in 1892, General Electric Company has grown into one of the largest and most diversified industrial companies in the world. Its variety of segments include Energy Infrastructure (30% of ’12 revenues); Aviation (13%); Healthcare (12%); Transportation (3%); Home & Business Solutions (6%); and Capital Finance (31%). On a geographic scale, more than half of General Electric’s revenues came from overseas in 2012.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.